Q3 2022 Lennar Corp Earnings Call

Today's conference is being recorded if you have any objections you may disconnect. At this time I will now turn the call over to Alexandra Lumpkin for the reading of the forward looking statement.

Thank you and good morning, Today's conference call May include forward looking statements, including statements regarding <unk> business financial condition results of operation cashless dry disease.

Forward looking statements represent our estimates on the date of this conference call and are not intended to give any assurance as to actual future results because forward looking statements relate to matters that have not yet occurred. These statements are inherently subject to risks and uncertainties. Many factors could affect future results and may cause <unk> actual activities or results to differ materially.

From the activities and results anticipated in forward looking statements.

These factors include those described in yesterday's press release, and our SEC filings, including those under the caption risk factors contained in the North annual report on Form 10-K, most recently filed with the SEC. Please note that one of our things no obligation to update any forward looking statements.

I would like to introduce your host Mr. Stuart Miller Executive Chairman, Sir you may begin.

Very good good morning, everyone. Thanks for joining us.

This morning, I'm here in Miami joined by Diane Bessette, Our Chief Financial Officer, David Collins, Our controller, and Vice President and of course, Alex who you just heard from John Jaffe, and Rick Beckwitt, Our co Ceos and co presidents are on the line also but they will be participating remotely for that.

Q&A.

As usual I'm going to give a macro overview and strategic Lenore plan. After my introductory remarks, Rick is going to talk about our markets around the country.

John will update on supply chain construction cost land strategy and as usual Diane will give a detailed financial highlights.

And we will give some rough boundaries for the fourth quarter to assist in go forward thinking and modeling and then we will answer as many questions as we can and as usual please limit to one question and one follow up.

So let me begin and start by saying that once again, our team has turned in an excellent third quarter results, which.

Which continues to enhance our positioning for the evolving market conditions.

Throughout our third quarter, we continued to manage the still constrained supply chain and workforce and delivered over 17200 homes with a gross margin of 29, 2% and a net margin of 23, 5%.

These deliveries continue to drive very strong cash flow and bottom line earnings as we continue to refine our already efficient operations with SG&A of five 8% for 120 basis point improvement over last year.

With strong bottom line earnings of $1 47 billion.

Or $5 <unk> per diluted share driving strong cash flow, we've continued to fortify our balance sheet.

After paying down $575 million of maturing senior debt without replacement, we ended the quarter with $1 3 billion of cash nothing drawn on our revolver and a 15% debt to total capitalization ratio as compared to 21, 2%.

Last year.

As a matter of cap careful capital allocation this quarter given current market conditions, we chose not to repurchase stock in favor of early retirement of debt.

As we've continued to drive strong closings in performance, we are well prepared to handle the current market conditions.

In addition to the well documented supply chain constraints and limited workforce slowing production.

Housing has now been considerably impacted by the more than doubling of mortgage rates over the past months and therefore, the doubling of monthly payment costs and reduction of housing affordability.

The housing market has continued to weaken as expected in response to the fed's too late but now very rapid and aggressive reaction to inflation.

Building finds itself once again at the forefront of all of that is happening in the economy and the fed's used of its interest rate tool to curtail inflation is certainly having the desired effect on the for sale housing market the.

The market is now adjusting.

The interest rate movements, we're very sudden and adjusted very quickly and that sudden this has always led to a pullback in housing demand.

Part of the pullback is driven by simple affordability and part of the pullback is driven by the psychology of the sudden and aggressive interest rate.

Interest rate hike, causing either monthly payments sticker shock or a sense of having missed the boat.

The fed chairs additional increase of 75 basis points of the fed funds rate yesterday together with an articulated determination to do more suggests that even more challenges lie ahead.

While demand has cooled at once high priced at once by pricing level demand for shelter still exists.

Price intersect with current interest rates to produce an affordable monthly payment.

There is still a housing shortage across the country, especially workforce housing and household formation has continued to rise.

There is still very limited inventory.

There's very little exposure to traditional inventory overhangs like foreclosures and speculators. Additionally.

Additionally, buyers are still seeking shelter from inflationary pressures on rentals as scarce rentals.

An increased demand from those who would otherwise purchase drive and keep rents higher.

As we bring prices down and incentives up demand is still there and these fundamentals give us assurance that while there is short and medium term reconciliation, but long term prospects for housing continued to be strong.

Demand remains reasonably strong at adjusted prices as buyers still have jobs as well as down payments and have attractive credit scores and can qualify.

With higher rates prices must be adjusted downward in incentives used to find the market or sales just drop off.

Accordingly, we have carefully managed sales price and our pace through the third quarter exactly as we said we would last quarter.

Although our sales are down 12% from last year's levels, we have focused our management's attention on finding pricing levels that attract demand.

Each market is different and it.

As much as it is an art and not a science our efforts has slightly lagged our goal of matching our sales space with our start pace, but we feel certain that we will find pricing and accelerate that pace in the near future.

In a few minutes Rick is going to give a more detailed overall market review that will give a more comprehensive snapshot of what we've seen in our markets across the country.

Along with bringing home sales price down we are also laser focused on bringing down production costs as well.

We are working with our vast network of trade partners to recognize that the world has changed and we all have to work together to keep the machine working.

In fact last night I returned from a two day extraordinary supply chain conference that was hosted by our purchasing leadership group led by Kevin Gillis trade.

Kevin Gillis great.

Great Partners and Lenore Division leaders convened to work together to attack cost find efficiencies and adjust to current market conditions, Rick and Jon will drive continued and focused attention on this critical initiative.

And as the market Recalibrates land costs will have to adjust as well.

Accordingly, we are reviewing and re underwriting every land deal in our pipeline to the current market conditions in time, new land deals will have different pricing that will be properly sized to the home sales prices.

Overall these are the trends as we see them and while we can choose to fight against the trends. The reality is that the market has been changing and we are getting ahead of it by making all necessary adjustments.

Last quarter, we laid out our simple strategy playbook going forward.

Let me review and add a few items, we're going to keep it simple and focused and here to this core strategy.

First as I said last quarter, we're going to continue to sell homes adjust pricing to market conditions and maintain reasonable volume.

We have discussed over the past years that we have a strong that we have a housing shortage across the country.

We will continue to build even as prices adjust in order to fill that shortfall and provide much needed workforce housing.

As we have noted many times in the past whether the market is improving or declining we employ our dynamic pricing model week by week to price product to current market conditions in order to maximize pricing and margin, while we maintain a very carefully and limited inventory.

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As the market moves that is how we will continue to be responsive.

Second we are going to work with our trade partners as I've said to rightsize, our cost structure to current market conditions as well.

Third we will and have sharpened our attention on land acquisitions.

We are being extremely selective on new land acquisitions and new communities.

We have re reviewed and re underwritten every land deal in our pipeline and we are re underwriting to current market conditions.

Capital allocation is being micro manage at every dollar invested in land must compete against repurchasing our own stock as we seek to maximize total shareholder value and returns.

Yes.

In sync with selling homes, we will continue to improve our cost of doing business by focusing on and reducing SG&A.

We have seen quarter over quarter improvement in our SG&A over the past years, and we expect to drive efficiencies through technology and process improvement to offset market adjustments, where possible, while we leverage our extraordinary management team across the country.

Next we will maintain tight inventory control.

We are aware that our inventory levels are up 20% year over year.

This increase is mostly a function of growth supply chain dysfunction and expanded cycle time.

As our growth rate is reduced to zero.

And our cycle times revert to normal our inventory should shrink and should generate sizable cash flow in the future.

Our commitment.

<unk> sales pace.

We will ensure that we will not create standing inventory in its place.

Next we will continue to focus on cash flow and bottom line to protect and enhance our already extraordinary balance sheet.

And finally, we will conclude our long planned at a weighted spin off by year end <unk>.

Recent back and forth questions with the SEC could push the final date by a month or so but for taro will be listed very soon.

Of course prior to the spin we will have a comprehensive company overview and conference call to introduce the new management team and to further detail the financial elements of the company stay tune.

As we have continued to refine and finalize the three verticals of our spin company.

We will spend a mature asset management company into the public market along with billions of dollars of assets under management that we previously held on <unk> books.

<unk> will be a pure play homebuilding company with a simple mandate to build and sell homes that delight, our customers, while we drive and maximize shareholder value.

The final spin of our new company Portera will trade under the stock symbol queue and we will have as noted before we will be an asset light asset management business that will have a limited balance sheet. We are very excited about the prospects for core tariff as this is our second spin in our history.

And we have great confidence for its prospects for the future.

So let me conclude by saying that while the market is shifting and adjusting to a new higher interest rate environment.

<unk> are prepared.

We have been here before and we have navigated adversity.

We have a seasoned team that knows exactly what to do and how to do it every member of our management team is fully aligned and working in a coordinated way we.

We are extremely well positioned financially organizationally and technologically to thrive and to succeed in these conditions.

We recognize that interest rates are rising inflation continues to be a legitimate threat and important parts of the economy are slowing.

We know that the fed is determined to curtail inflation and this will take some time.

But we also know how to adjust to the market to these market changes and we are making those adjustments.

As we look to the remainder of 2022, we recognize there are challenges in the market that we must carefully regardless and expect that we will meet the challenges and that we will continue to adjust to maximize opportunity and drive <unk> into an ever better future with that let me turn it over to Rick.

Thanks, Stuart as you can tell from Stuart's opening comments. The overall housing market has been reacting to significant increases in mortgage rates continued inflation.

The volatile stock market, all of which has impacted affordability and home buyer confidence.

We continue to have some strong markets in a more challenging areas. We've had to adjust prices can increase incentives to regain sales momentum.

Our sales strategy has been to find the market clearing price for each of our homes on a community by community basis as quickly as possible.

Price our homes accordingly.

As required a detailed understanding of traffic trends inventory levels community and product specific pricing financing programs and buyer sentiment.

During the third quarter, our new sales orders declined by 12% from the prior year on a 1% lower year over year community count.

While our cancellation rate and sales incentives ticked up during the quarter, our sales orders and sales pace per community increased sequentially. Each month, as we successfully executed our pricing strategy and more and more markets.

Colorado, our sales pace per community in June July and August was 3739 and $4 five respectfully.

Before for the quarter.

We achieved this we lowered our debt we lowered our base new order sales price and increased sales incentives in many communities.

On a companywide basis, new sales order incentives increased during the quarter from two 3% in June .

6% in August and varies significantly by market and community.

Based on these combined adjustments, our new net order sales price declined 9% sequentially from the second quarter, but was up 1% from the prior year.

This pricing strategy produced enough new gross sales to offset cancellations companywide as our third quarter cancellation rate was 21%.

Which is slightly above our historical average.

Our pricing strategy has continued to work successfully in September .

Gives us confidence in our new sales orders guidance for the fourth quarter.

We fundamentally believe that this price to market strategy reflects our balance sheet first suppose focus where we can maintain starts and sales generate cash flow and keep our homebuilding machine going.

I would now like to give you an update on our markets across the country.

They really fall into three categories.

Some markets that have continued to perform well to markets, where we have adjusted pricing and incentives.

The market price and have successfully regain sales momentum.

Three markets that may require some additional pricing adjustments to regain our targeted absorption pace.

During the third quarter and so far in September .

Had nine markets that continue to perform well.

These are southwest, Florida, Southeast, Florida, Atlantic, New Jersey, Maryland, and Virginia, Charlotte, Indianapolis and San Diego.

These markets are benefiting from extremely low inventory and many are benefiting from a strong local economy employment growth and in migration.

While these markets have continued to be strong we have had to offer mortgage buy down programs and normalized incentives remain sale maintain sales momentum.

Some communities in these markets have required targeted price adjustments on a limited basis.

Our category two markets, which reflect markets, where we have made more significant adjustments to regain sales momentum include 22 markets.

Our Tampa, Orlando, and Jacksonville, coastal Carolinas, Atlanta, Chicago, and Nashville, Raleigh, Dallas, Houston, San Antonio Phoenix, Tucson, Las Vegas, Colorado, Coastal Carolina, California, coastal Carolinas inland Empire.

The area, the Central Valley, Sacramento, Seattle and Portland.

Each of these markets traffic has slowed and we saw a pickup in cancellations.

Inventory is limited in each of these markets we've had to offer more aggressive financing programs based price reductions <unk> increased incentives to regain sales momentum.

Size of the adjustments has varied on a community by community basis has often been limited to specific homes in each week and each community each week.

In some cases to avoid cancellations, we have adjusted pricing on our homes in backlog.

We believe we are being very proactive with our pricing and not reactive.

This allowed us to sell homes and avoid building finished inventory.

We are outselling the competition and are increasing our market share.

Category three markets, which reflects.

More significant market softening in correction include seven markets.

Are the Philly Metro area, Minnesota, Pensacola, Austin, Reno Boise in Utah.

All the drivers and individual dynamics of these markets are very somewhat traffic has slowed significantly buyers are taking more time to make a purchase decision and many need to be convinced that now is the time to buy.

There is fear that sales prices has not hit bottom, which has led to an elevated level of cancellations. In these markets. We are focused on establishing pricing that generates new gross sales to offset cancellations.

This has required us to work in many cases with backlog to prevent cancellations.

It's also required a mix a significant base price adjustments.

Annas and aggressive mortgage buy downs.

While we've made progress in these markets.

Still need to make some adjustments on a community by community basis.

Not a one size fits all solution everything needs to be fine tuned to the specifics of the market and community.

I'm confident that we'll make progress in each of these markets in the fourth quarter.

We are fortunate to have solid gross margins and limited completed unsold inventory. So we should be able to get these markets on track shortly.

I Hope this gives you a better picture of our markets across the country and what we're doing to keep our sales activity going.

Markets remain very fluid and we are making proactive strategic decisions and adjustments every day.

We are committed as a management team to address any future market changes quickly.

As we've said in the past, we're going to keep our homebuilding machine going maintain our starts pace and price our homes to market.

This is our balance sheet for us.

Before I turn it over to John I'd like to thank our all of our trade partners and associates for their hard work and endless dedication. During these rapidly changing times successfully executed our operating strategies.

Now I'd like to turn it over to John .

Thanks, Rick This morning, I will discuss our sales and inventory management focus our land strategy and give an update on the status of the supply chain.

I'd like to start by laying out a few additional thoughts on the detail that Rick just walked you through.

As discussed this quarter was all about the daily process of adjusting home prices to find market clearing values and each individual community.

As noted our starts and sales pace for the quarter were $4 four homes and 4.0 homes respectively.

This gap between starts pace in sales pace comes from the time it takes to make the pricing adjustments necessary to be perceived as value by the consumer finding.

Finding that value proposition is a process that takes several weeks and is ongoing.

Other words once market pricing has found through discovery the market often experiences further adjustments and a new value proposition must be discovered.

We went through the process of finding clearing prices in communities. This informed our decision, making which enabled broader pricing adjustments leading to our improved sales pace across our entire platform for the month of August .

So we should be able to get these markets on track shortlyi hope this gives you a better picture of our markets across the country and what we're doing to keep our sales activity going. Markets remain very fluid and we are making proactive strategic decisions and adjustments every daywe are committed as a management team to address any future market changes quickly. As we've said in the past, we're going to keep our homebuilding machine going, maintaining our starts space and price our homes to market. This is our balance sheet forthisbefore I turn it over to John , I'd like to thank all of our trade partners and associates for their hard work and endless dedication during these rapidly changing times. excessfully execute our operating strategies. Now like to turn it over to jobthanks, Rick. This morning I will discuss our sales and inventory management focus, our land strategy and givevenan update on the status of the supply chain. I'd like to start by laying out a few additional thoughts on the detail that Rick just walked you through. As discussed, this quarter was all about the daily process of adjusting home prices to find market clearing values in each individual community. As noted our starts and sales pace for the quarter for four point four homes, four homes respectively. This gap between starts pace and sales pace comes from the time it takes to make the pricing adjustments necessary to be perceived as value by the consumer. Finding that value proposition is a process that takes several weeks and is ongoing. In other words, once market pricing is found through discovery, the market often experiences forurtheir adjustments and a new value proposition must be discovered as we went through the process of finding clearing prices in communities.

<unk> noted our operators use our dynamic pricing model to help them understand the timing of inventory as it moves through the construction process.

This tool gives us visibility into sales pace and associated pricing by community and even by plan, allowing us to maintain our starts pace without building up excess inventory.

Our inventory position at the end of the quarter was just over 500 completed unsold homes or 0.4 homes per community.

Next I want to discuss our land focus in the third quarter.

As expected, we focused a lot of attention on reassessing every land deal in our pipeline along with updating our underwriting.

Based on our intense review we move forward only on those deals with starts in 2023 and where we we're also confident in the updated financial underwriting.

Most of the land deals we closed on in the quarter came from our strong land relationships with existing structure quarterly checkouts.

Takedowns are deals, where we would be starting the homes quickly and still projected healthy margins all.

All other deals based on the updated underwriting either had its timing delayed was restructured where we did not proceed.

Our intensified focus on our land light strategy was evidenced by our controlled homesites percentage, increasing to 63% at the end of the third quarter up from 53% last year.

Also further reduced the years of owned Homesites to two nine years at the end of the third quarter down from three three years last year.

We reduced the number of home sites purchased in the third quarter to about 13100 down 21% from 25% year over year and sequentially respectively.

This informed our decision-making, which enabled broader pricing adjustments, leading to our improved sales pace across our entire platform for the month of August . As Stewart noted, our operators use our dynamic pricing model to help them understand the timing of inventory as moves through the construction process.

Our extreme focus on a deal by deal review and adherence to our disciplined land lighter model drove the significant improvement and the strength of <unk> balance sheet that Stuart discussed.

Now I'd like to turn to the current state of the supply chain our.

This tool gives us visibility into sales pace and associated pricing by community and even by plan, allowing us to maintain our starts pace without building up excess inventory.

Our third quarter continued to presenting some favorable cycle time results, while still dealing with ongoing disruptions from certain material shortages.

So it was minor it is still significant that we achieved a three day reduction in cycle time in Q3 from Q2.

Our inventory position at the end of the quarter was just over 500 completed unsold homes, or zero zero point four homes per community.

Additionally, over 50% of our markets experienced cycle time reductions in the third quarter compared to 25% in the second quarter.

Next I want to discuss our land focus in the third quarter. As expected, we focused a lot of attention on reassessing every land deal in our pipeline, along with updating our underwriting based on our intense review. We move forward only on those deals that starts in 2023 and where we were also confident in the updated financial underwriting.

The primary material disruption in the third quarter was related to the delivery of electrical electrical equipment, such as switchgear multi meter boxes and pad melted transformers.

Construction labor remains very tight as industry wide high levels of volume for second half deliveries moves through the various stages of construction.

Most of the land deals we closed on in the quarter came from our strong land relationships with existing structured quarterly takeowndowns. These takedowns our deals where we would be starting the homes quickly and still projected healthy margins.

We expect to start seeing some easing in labor as the overall industry reduce at the level of construction starts. This easing should start would start to first occur in the fourth quarter with front end trades in the first quarter with finish trades.

All other deals based on the updated underwriting either had its timing delayed, was restructured or we did not proceed.

As expected cost increasing our third quarter as increases from lumber that spiked in Q1 flowed through our third quarter closings. We also saw increases in other material costs and labor in Q3 closings, resulting in a total direct construction cost increase of 6% and 21% sequentially and year over year, respectively.

Our intensified focus on our landlide strategy was evidenced by our controlled home site percentage increasing to 63% at the end of the third quarter up from 53% last year. We also further reduced the years of owned home sites to two point nine years at the end of the third quarter down from three point three years last year and we reduced the number of home sites purchased in the third quarter to about 13.1 thousand down 21% of 25% year over year and sequentially respect to.

As a reminder, the drop in lumber prices, we saw earlier in the year materially benefited the cost of our starts in the third quarter and will flow through deliveries in the first half of 2023.

Thank you I'll turn it over to Diane.

Our extreme focus on a deal- -idedeal review and adherence to our disciplined landlighter model drove the significant improvement in the strength of Lennar's balance sheet, as Stuart discussed.

Thank you John and good morning, everyone.

Rick and Jon is great.

Great deal culinary refining our homebuilding performance. So therefore, I'm going to spend a few minutes on the results of our other business segments in our balance sheet, and then turn to Q4 guidance. So starting with financial services in the third quarter, our financial services team produced operating earnings of $99 million excluding <unk>.

nowi'd like to turn to the current state of the supply chain.

Our third quarter continued presenting some favorable cycle time results, while still dealing with ontogoing disruptions from certain material shortages.

Although it was minor it is still significant that we achieved a three -day reduction in cycle time in Q3 from Q2 and.

Coating of the onetime litigation.

And then looking at the details our mortgage operating earnings was $64 million compared to $80 million in the Permian here as we've indicated for several quarters. The mortgage market continues to be extraordinarily competitive purchase business. As a result secondary margins have been decreasing this decrease in earnings.

Additionally, over 50% of our markets experienced cycle time reductions in the third quarter, compared to 25% in the second quarter.

The primary material disruption in the third quarter was related to the delivery of electricalelectrical equipment such as switchgear multimmeter boxes and pad M their TRANSFORMERS.

Partially offset by an increase in interest rate lock commitments.

Construction labor remains very tight as industry-wide high levels of volume for second half deliveries moves through the various stages of construction.

Total operating earnings were $33 million compared to $26 million in the training here.

We expect to start seeing some easing in labor as the overall industry reduces at the level of construction starts. This easing should start start to first occur in the fourth quarter with front-end trades and in the first quarter with finished trades.

<unk> increased primarily as a result of higher volumes and an increase in revenue per transaction or financial services team continues to rise to the occasion, each and every quarter.

Our homebuilding divisions and properly service our customers.

As expected, cost increased in our third quarter as increases from lumber that spiked in Q1 flowed through our third quarter closings.

And then turning to the other segment for the third quarter. Our other segment had an operating loss of 118 million. This loss was primarily the result of a noncash mark to market loss on our publicly traded technology investments, which totaled 86 million.

We also saw increases in other material costs in labor in Q3 closings, resulting a total direct construction cost increase of 6% and 21% sequentially and year-over-year respectively.

As we've mentioned before we are required to mark to market. Many of our technology investments that are publicly traded.

As a reminder, the drop-in lumber prices we saw earlily in the year materially benefited the cost of our starts in the third quarter and we'll flow through deliveries in the first half of 2023. Thank you, and I'll turn it over to Diana.

<unk> will fluctuate from quarter to quarter. However.

However, we believe these technology partnerships provide significant operational efficiencies for both our homebuilding and financial services platform and greatly improve our customers' experience.

Thank you John , and good morning everyone. The Stuart reckon John has provided a great deal of color regarding our homebuilding performance, So therefore I M going spend a few minutes on the results of our other business segment in our balance sheet and then turn to Q4 guidance, the starting with financial services.

And then looking at our balance sheet quickly.

<unk> heard us mentioned in this quarter, we were laser focused on managing our balance sheet. He focused on generating cash by pricing to market and we focus on preserving cash by monitoring our stocking and carefully reviewing potential land purchases in results as you've heard us say that we.

For the third quarter, our financial services team produced operating earnings of 99 million, excluding the recording of a onetime Litigation cool and are looking at the details. Our mortgage operating earnings were 64 million compared to eight million in the prior year. As we've indicated for several quarters, the mortgage market continues to be extraordinarily competitive for purchase business. As a result, secondendary margins have been decreasing.

We ended the quarter with $1 3 billion of cash and no borrowings on our $2 6 billion revolving credit facility.

<unk> added a total of $3 9 billion of homebuilding liquidity.

During the quarter, we continued our practice of becoming land lighter and at quarter end, we owned 184000, Homesites and controls 307000 home sites.

This decrease in earnings was partially offset by an increase in interest rate lock commitments.

Total of 491000 home sites.

Idle operating earnings were 33 million compared to 26 million in the prior year. Idle earnings increased primarily as a result of higher volumes and an increase in revenue per transaction.

This translates into $2 90 years of Homesites.

An improvement from three three in the prior year and 62% Homesites control an improvement from 53% in the prior year. Most importantly, we believe this portfolio provides us with a strong competitive position to continue to grow our market share.

Our financial services team continues to rise to the occasion each and every quarter to assist our homebuilding divisions and properly service our customers.

And then turning to the Lunar other segment, for the third quarter, our Lunar other segment had an operating loss of 118 million. This loss was primarily the result of a noncash mark-to-market loss on our publicly traded technology investments, which total eighty-six million.

Additionally, we continued to Delever, our balance sheet as we repaid 575 million units that we do in November of this year.

And we have no additional maturity in fiscal 2023, and the last several years, we have repaid $5 4 billion of senior notes with an associated annual interest savings of almost $300 million.

As we've mentioned before, we are required to mark-to-market many of our technology investments that are publicly traded and that valuation will fluctuate from quarter-to-quarter.

We continue to pay down our senior notes and continued strong generation of earnings.

However we believe these technology partnerships provide significant operational efficiencies, will build our homebuilding and financial services platform and greatly improve our customers' experience.

Homebuilding debt to total capital ratio down to 15% at quarter end, our lowest ever which is an improvement from 21 two in the prior year.

I'm looking at our balance: cheap quickly.

Our stockholders' equity increased to 23 billion, our book value per share increased to almost $79. A return on inventory was 32, 7% and our return on equity was 21%.

As you've heard, all of us mentioned this quarter. We were laser focused on managing our balance sheet. We focused on generating cash by pricing to market and we focused on preserving cash by monitoring our stock space and carefully reviewing potential land purchases.

Finally, we received an upgrade from Moody's during the quarter. Our credit rating was increased from <unk> three to be definitely too greatly appreciate needed confidence in our company and continue to be very pleased to have an investment grade rating from all three agencies.

Plan results, as you cred it say, is that we entered the quarter with one point three billion of cash and no borrowings on our two point six billion revolving credit facility. This provided a total of three point nine billion of full building liquidity.

During the quarter we continued our progress of becoming land lighter. At quarter end we owned 184 thousand home sites and controlsed 307 thousand home sites, for a total of forhundred than 91 thousand home sites.

In summary, the strength of our balance sheet strong liquidity and low leverage provide us with significant confidence and financial flexibility to navigate this uncertain market.

With that brief overview I would like to turn to guidance.

This translates them into two point nine years of home sites, hes and improvement from three point three as in the prior year, and 63% home sit control and improvement from 53% in the prior year. Most important though, we believe this portfolio of home sites provides us with a strong competitive position to continue to grow our market share.

As Stuart mentioned it continues to be difficult to provide the targeted guidance that we have historically provided given the uncertainty in market conditions. So as we did last quarter. We are providing very broad ranges to give some boundaries for each of the components. So let's start with new owners, we expect Q4, new orders to be in the range.

Additionally, we continue to delever our balance sheet as we reay five and 75 nineill 50 renotes that were due in November of this year.

<unk> of 14000 to 15500, and we expect our Q4 ending community count to increase about 5% from Q3.

And we have no additional maturity in fiscal 2023. in the last several years, we have repaid $5.4 billion of senior notes, with an associated annual interest savings of almost $3 million.

We anticipate our Q4 deliveries will be in the range of 20 to 21000 homes.

Sales price should be in the range of 475000 to 480000, our gross margins in the range of 26% to 27% and our SG&A between five seven and five 9% as we continued to price to market qunar inventory and generate cash for the combined homebuilding.

The continued paydown of senior notes and continued strong generation of earnings were at our home. Building debt total capital ratio down to 15% at quarter-end are lowest ever, which is an improvement from 21.2 in the prior year.

You had mentioned in land sale and other categories, including Noncontrolling interest, we expect a loss of approximately $15 million.

Our stockholders' equity increased to 23 billion our good value per share increased to almost $79. Our return on inventory was 33% and our return on equity was 21% and.

We anticipate our financial services earnings for Q4 will be in the range of $50 million to $60 million as market competition for purchase business continues to increase we expect earnings of $15 million to $20 million for our multifamily business into the other categories. We expect a loss of about $20 million.

Finally we received an upgrade for movies during the quarter. Our credit rating was increased from B a three to B a two We greatly appreciate movie's confidence in our company and continue to be very pleased to have an investment grade rating from all three agencies.

This guidance does not include any potential mark to market adjustments to our technology investments since that adjustment will be to be determined by the stock prices at the end of the quarter.

insummary, the strength of our balance sheet, strong liquidity and low leverage provide us with significant confidence in financial flexibility to navigate this uncertain market.

Our Q4 corporate G&A to be about one 2% of total revenues and our charitable foundation contract contribution will be based on $1000 per home delivery.

With that brief of W, I'd like to turn to guidance.

As sart mentioned, it continues to be difficult to provide the targeted guidance that we have historically provided, given the uncertainty and market conditions. So, as we did last quarter, we are providing very broad ranges to give some boundarings for each of the components.

Next our tax rate to be about 24, 5% and a weighted average share count for the quarter should be approximately 288 million shares and so when you put all this together this guidance should produce an EPS range of approximately $4 65 to $5 30.

So let's start with new orders. We expect Q4 new orders to be in the range of 14 thousand to 15.5 thousand and we expect our Q4 ending community count to increase about 5% from Q3.

Per share for the fourth quarter and with that let me turn it over to the operator.

Thank you at this time, we will begin the question and answer session. Please limit to one question and one follow up if you would like to ask a question you May Press Star one to withdraw. Your question you May Press Star two one moment. Please for the first question Colin Paterson with Wolfe Research you May go ahead.

We anticipate our Q4 deliveries will be in the range of two thousand to 21 thousand homes.

Our average sales price should be in the range of four cent and 75 thousand cent. four hundred and eighty thousand, our growth margins in the range of twentysix percentto 27% than our SGNA between five point seven cent andfive 1%, as we continue to price to market, churn our inventory and generate cash.

Sir.

Hey, good morning, everyone. Thanks for taking my questions.

So you all you all have been pretty open about the fact that you intended to throttle the incentive level to really drive volumes and.

So the combined homebuilding, joint venture, land sale and other categories, including noncontrolling interest. We expect the loss of approximately Fifteen million.

The orders down 12% as I think a good result in the current environment. So.

We anticipate our financial services earnings through Q4 will be in the range of 50 to six million. As market competition for purchase business continues to increase, we expect earnings of 15 to two million for our multifamily business, and so though linar other category, we expect a loss of about two million. This guidance does not include any potential mark-to-market adjustments to our technology investments, since that adjustment will be ter be determined by their stock prices at the end of our quarter.

Your order ESP fell 9% sequentially.

All four regions it looks like they ticked lower.

Hoping you can help us understand how much of that that 12% decline was.

A function of base price cuts.

Incentives et cetera was it the overwhelming majority.

Or was there some product mix shift in there.

Except our Q4 corporate gna to be about 1% of total revenues, and our charitable foundation con contribution will be based on $1 thousand per home delivery.

Okay.

Why don't I, let Rick take that go ahead, I'm going to play a little traffic cop here because we are in remote locations. So go ahead Greg.

As I mentioned in my commentary there was about a four 5% incentives that was priced in the quarter right.

We expect our tax rate to be about 24% and the weighted average share count for the quarter should be approximately 288 million shares.

Some of the some of that was a base price change with.

And so, when you pull this together, this guidance should produce an EPS range of approximately $4 and 65 cents to $5 and 30 cents per share for the fourth quarter.

With a slight mix adjustment as we closed.

A more significant amount of.

Entry level homes during the quarter.

And with that let me turn it over to the operator.

Okay, perfect. So that four 5% increase captures both the incentive level in the base price cuts are alright.

Thank you. At this time we will begin the question and the answer session. Please limit to one question and one follow-up. If you would like to ask a question, you may press star one to withdraw your question. You may press star to one moment. Please for the first question, Truman Patterson, with Wolf research, you may go ahead, sir.

For that end.

You will now have increased your option land, 63% of your portfolio you know, it's been a pretty rapid.

Shifting over the past couple of years and you mentioned that you reassessed every.

On your pipeline and Youre working with partners to improve underwriting standards.

Good morning everyone. Thanks for taking my questions. So you all, you all been, you know, pretty open about the fact that you intended to throtle the incentive level to to really drive volumes and you know the orders down. 12% is, I think, a good result in the current environment. So your order a's P fell 9% sequentially. All four regions look like they take lower. I'm just hoping you can help.

Could you help us understand if you've actually been walking away.

From deals at an accelerated pace I noticed your option lots.

Declined in the quarter.

Could you discuss just the willingness of your partners to work with you all and any chance you might be able to help us quantify what portion of <unk>.

Controlled deals might be on the watch list or at risk.

So let me.

Let me give a broad thought process on that.

There is there are a couple of buckets you got to think about.

Some of the shorter term deals that we have.

<unk> been working through that we owned Homesites in those Homesites continues to be.

Valuable assets that we are working that.

Are in remote location, So go ahead, right.

Putting into production and generating an attractive margin on even in current market conditions.

So as I mentioned in my commentary, there was about a four point, a 5% incentive that was priced in the quarter. Right, it was some. Some of that was a base price change with a slight mix adjustment as we closed a more significant amount of entry-level homes during the quarter.

We will continue.

To build through those communities.

That's one of the benefits.

Benefits of shorter term deals.

As.

They generally will work through and still generate an attractive margin.

In every land deal that we have in our pipeline, we are going back and doing the re underwriting.

Okay perfect for that. four and a half percent increase captures both the incentive level and the base price cuts. All right, thanks for that. And you all now have increased your option land a 63% of your portfolio. You know it's been a pretty rapid shift over the past couple of years and you mentioned that you reassessed every you know deal in your pipeline and you're working with partners to improve underwriting standards.

Not just one time, but on a pretty regular basis, given the movements in market conditions and so the answer to your question is we will walk away.

From programs that we have a land that we have under contract that no longer meet the underwriting criteria.

Could you help us understand it if you've actually been walking away, you know, from deals at accelerated pace, I notice your option lot declined in the quarter. Could you discuss just the willingness of of your partners' to to work with you all and any chance you might be able to help us quantify what portion of of controlled deals might be on the watchlist or or at risk?

<unk>.

And where.

Where we have the ability to walk away at that.

Practice cost.

We're just not going to go forward on deals that no longer meet the underwriting criteria.

That is the benefit that that comes to bear given the way that we've migrated our land program over the past couple of years.

Over this past quarter, there are deals that meet the stringent.

So let me, let me give a broad thought process on that.

Alright, and criteria and deals that don't and those that don't fall out of the filter.

There is. There are a couple of buckets. You have think about some of the shorter term deals that we have been working through, that we own home sites and those hhome sites continue to be valuable assets that we're working, that we're putting into production and generating an attractive margin on, even in current market condvisions. We will continue.

We've walked away and we will come back another day.

Okay.

So we probably we probably walked away from something in the nature of 10000 Homesites.

Just over this past quarter is that it.

And Rick Jon do you want to weigh in on that.

So I would just add that we have.

Extremely strong relationships with.

A lot of OEM partners.

Relative to your question, we are able to work with them to just timing.

To build through those communities. That's one of the benefits of shorter-term deals is.

To restructure.

To change pace.

And that combined with as Stuart described.

They generally will work through and still generate an attractive margin in every land deal that we have in our pipeline. We are going back in doing the reunderwriting on a not just one time but on a pretty regular basis, given the movements in market conditions.

Most of it refresh analysis just keeps us very current so that the land. We are acquiring is turning into starts very quickly with very acceptable margins and if it doesn't fit that criteria. We're finding the appropriate alternative solution for the asset.

Alright, Thank you all and good luck in the upcoming quarter. Okay. Very good. Thanks next question. Please. Thank you Susan Macquarie from Goldman Sachs. You May go ahead.

And so the answer to your- your question is: we will walk away from programs that we have or landam, that we have under contract that no longer meet the underwriting criteria and where we have the ability to walk away at an attractive cost. We're just not going to go forward on deals that no longer meet the underwriting criteria.

Thank you good morning, everyone. Good morning.

First question is Stuart you talked a lot about cash generation.

And as we do think about the overall market moderating can you talk to some of the changes in the business today relative to the past cycle, what that will mean for your ability to generate cash as we think about things changing on the ground in the areas that you're really focused on investing in in order to position the business for that eventual Rick.

And that is the benefit that comes to bear, given the way that we've migrated our land program over the past couple of years, So over this past quarter, their deals that meet the stringent underwriting criteria and deals that don't, and those that don't fall out of the filter and we've walked away and we'll come back another day.

Coverage, and where you see <unk> going over time.

Great question.

Historically, if you look at the composition of Lenoir and many of the builders we've migrated away from those longer term land positions that have really stuck in the mud as the market has gotten slow.

So we probably, we probably walked away from something in the nature of one thousand homeom sites just over this past quarter. That it done and, Rick John , do you want to weigh in on that?

Because we have basically converted our land asset to short term assets those assets, we will turnover.

I would just add that we have extremely strong relationships with a lot of land partners and'll to your question, we are able to work with them to either adjust timing to restructure, to change pace. That, combined with store described- just a constant refresh analysis, just keeps us very current So that the land we are acquiring isattorney at the starts very quickly, with very acceptable margins.

As as we continue to produce through the current market conditions.

And so and we'll replace those assets with land assets that are re priced given the current market condition. So that's a structural change.

Inland or specifically and in the industry more broadly.

That I think is going to be very cash generative.

A number of things that work against homebuilders and downtime one of them as long term land.

And if it doesn't fit that criteria, we're finding the appropriate alternative solution for the asset.

And and that's been that's been mitigated the second thing I'd say is.

All right, Thank you all and good luck in the upcoming quarter. Very, very good thanks. Next question, Please. Thank you Susan mclie from Goldman Sachs. He may go ahead.

<unk>.

When you're growing a homebuilding company.

One of the big cash users is the growth component, we're constantly buying land and putting more sticks and bricks in the ground to accommodate growth as you migrate to a slower growth level or a zero growth level that in itself is cash generative. So.

Thank you. Good morning everyone. Good morning. My first question is: you know you talked a lot about cash generation and, as we do think about the overall market moderating, can you talk to some of the changes in the business today relative to the past cycle, what that all mean for your ability to generate cash? As we think about things changing on the ground and the areas that you're really focused on investing in in order to position the business for that eventual recovery, and where you see when?

Now short term land position plus migration to a no growth environment, both very cash flow positive and then the one anomalous component is the cycle time that is derived from the supply chain impairment that we've been dealing with.

That has added about 25% more cash use inventory buildup relative to normalized times.

As we've noted before we've added about two months two are generally six months cycle time.

And I think thats, an industry kind of average.

Us will turn over, you know, as as we continue to produce through the current market conditions, and so we will replace those assets with land assets that are repriced given the current market condition.

And that two months ultimately is going to find its way to resolution, we will see a reversion back to a normalized kind of cycle time in production and that also should be tailwind wins at our back in terms of generating cash as we have a normalization.

So that's a structural change in lar specifically and in the industry more broadly, that I think is going to be very cash generative. There are a number of things that work against homebuilders in downtown. one of them is long term land and and that's been, that's been mitigated. The second thing I'd say is when you're growing.

Might take place this year might take place over the next couple of years, but it should generate cash as we go forward.

Okay.

Very helpful color and then following up affordability is obviously, a key focus as rates rise and the macro changes can you talk to some of the benefits of your underlying operations and how youre able to sort of.

A homebuilding company. one of the big cash users is the growth component. We're constantly buying land and putting more fixs and bricks in the ground to accomdate growth as you migrate to a slower growth level or a zero growth level. That in itself is cash generative. So now, short term land position plus migration to a no growth environment, both very cash flow positive.

Drive that that narrow band between the tensions that exist on the cost side relative to what the consumer needs and the ability to get those first time kind of homebuyers into our house.

Well listen I'm going to have Rick and Jon both speak to this let me just say as a general overview.

Along those lines.

Three of US just left a two day session with our trade partners.

And the partnership that exists among our operating groups in the field and our trade partners.

And then the one anomalous component is the cycle time. That is derived from the supply chain impairment that we've been dealing with. That is added about 25% more cash use inventory build up relative to normalized times. As we've noted before, we've added about two months to our generally six month cycle time.

<unk> came to light as we had straight conversation about what the market's doing and partnership and recognizing that we've all got to find a way to reconcile cost to enable affordability in the sales price of the home.

That goes to our land partners as well as to our trade partners.

I think that.

And I think that's an industry kind of average and that two months ultimately- is going to find its way to resolution. We will see a reversion back to a normalized kind of cycle time and production and that also should be tailwinds wins in our back in terms of generating cash as we have a normalization might take place this year, might take place over the next couple of years, but it should generate cash as we go forward.

Across the industry everybody recognizes that there is going to have to be a cost reconciliation as interest rates go up it's clear that theres going to be more increase in interest rates that we're going to be dealing with so we've got a band together to make the machine more and that means a cost structure that enables affordability Rick Jon.

Yes, exactly what you said store, it's a combination of us reducing sales prices and having a margin impact and you saw that we executed on that during the quarter.

Ok that that's very helpful. Color and then following up affordability is obviously a key focus as rates rise and the macro changes. Can you talk to some of the benefits of your underlying operations and how you're able to sort of drive that, that narrow band between the tensions that exist on the cost side relative to what the consumer needs and the ability to get those first time kind of home buyers into a?

We've discussed with our trade partners that there needs to be a sharing.

Everyone made a lot of money during the up cycle and it's time to work as partners to restructure the cost side on both the labor and materials side.

And in addition, as Stuart will walk through the land side of the business.

Going to be some adjustments in land pricing.

Collective.

Of all three of those that we will do in order to execute the strategy to keep the sales momentum going.

And the only thing I would add is that we're also during this time.

As Rick highlighted we have to fund.

The right price to match the affordability respective in reality that our customer has as we look very carefully at our product offering.

See where we can do some significant value engineering as well as introduce smaller more efficient product into certain markets. So we continue to move down the price curve.

We had straight conversation about what the market is doing and partnership and recognizing that we've allved got to find a way to reconcile costs to enable affordability in the faal price of the home. That goes to our land partners as well as to our trade partners. I think that you know across the industry everybody recognizes that there's going to have to be a cost reconciliation. As interest rates go up, it's clear that there's going going to be more.

And meet the place where affordability for the consumer intersects with mortgage payment in home prices.

Yes, I guess bottom line. This is a dynamic situation and the.

The execution part of that is alignment you hear alignment with me, Rick and Jon and we've conveyed that through the Lamar organization through the trade partners and to our land partners as well.

Increase in interest rates that we're going to be dealing with. So we've got to band together to make the machine work, and that means the cost structure that enables affordability. Rick joh.

That work is going to be done and everybody is at work.

Okay. Thank you and good luck with everything. Thank you next question. Please.

Yes exactly what you said, steuart. It's a combination of us reducing sales prices and having the margin impact, and you saw that we executed on that during the quarter.

Thank you Stephen Kim with Evercore ISI you May go ahead Sir.

Yes, thanks, very much guys. Just a first question just from a housekeeping perspective from calculating your starts were probably about 15700 correct me if I'm wrong and then you talked about inventory, maybe freeing up some cash I think you said that cycle times moderating cycle times eventually.

We've discussed with our trade partners that there needs to be a sharing. Everyone made a lot of money during the upcycle and it's time to work its partners to restructure the cost side, on both the labor and material side, and in addition, as Stuart walk through the land side of the business, there's going to be some adjustments in land pricing. So it's the collective.

It was.

It was 25% I guess of the growth.

I suppose that was a comment about your sticks and bricks inventory. So bottom line is on the inventory I am thinking that the cycle time negative impact.

Of all, three of those that we will do in order to execute the strategy to keep the sales momentum going.

Am I right in thinking that Youre, saying that thats about one $8 billion of cash that's burdening your current inventory.

Only only thing I would add is that we're also during this time as highlight. We have to find the right price to match the affordability perspective and reality that our customer has, is we look very carefully at our product offering.

So that number and then also the 15700 starts is that in the ballpark.

So happy you asked the question that way Steve.

I will tell you that Diana tried to figure out what's the number is and that specificity.

To see where we can do from significant value engineering as well, introduce small and more efficient product into certain markets. So we continue to move down the price curve and meet the place where affordability for the consumer intersects with mortgage payment and home prices.

It is.

We haven't been able to put our finger on it but it is in that kind of neighborhood.

A significant amount of dollars that are either because of the cycle time increase.

Yes.

And since give you a frequency of about 16000 start disclosing that Matt.

I guess at bottom line. This is a dynamic situation and the.

Got you and then in addition to that $1 8 billion neighborhood kind of number you had also mentioned that you could see your inventory shrink further due to slower growth more on the on the land side and that sort of stuff, but I assume that growth comment as temporary so I'm thinking that near term or longer and longer term. The opportunity is probably really on the web.

anexecution. Part of that is alignment. You hear an alignment with me, Rick and John , and we've conveyed that through the lenar organization, through the trade partners and to our land partners as well. That works, got to be done and everybody's at work.

Okay Thank you and good luck with everything. Thank you, next question, Please.

So correct me if I'm wrong on that.

But I wanted to ask about your standing inventory comment as well.

Thank you, Stephen Kim. Whatever core I ifi, you may go ahead sir.

You said I think John you mentioned you have about 500 finished completed spec our finished specs right now.

Yeah Thanks very much, guys. Just first question, just from a housekeeping perspective. From calculating, your starts were probably about 15.7 thousand- correct me, I'm wrong. And then you talked about inventory, maybe freeing up some cash. I think you said that cycle times, moderating cycle times, eventually you know was you know was 25%, I guess, of the growth. I suppose that was a comment about your sticks and bricks inventory.

I would calculate that that's about two to three times.

Where you typically have two to three times more than that before the pandemic hit and all of that on a per community basis, and so I'm wondering is this 500 like the new normal for you is this a new desired level for you and if so why is that if what we've been hearing is true that you are you seeing that folks are.

So belona line is on the inventory. I'm thinking that the cycle time negative impact.

Actually fairly actually preferring customers are preferring homes that they can move into more quickly just wanted to understand if theres any change in your thinking about managing specs as they get near completion and.

Am my right in thinking that you're saying that that's about $1.8 billion of cash that's burdening your current inventory. So that number, and then also the 15.7 thousand starts, is out in the ballpark.

And why you might be looking to reduce that that number in light of customer preferences.

So happy asked the question. That way VE, I will tell you that Diana have tried to figure out what the number is and that specificity is.

So another good observation youre absolutely right.

We basically run our inventory around about one home per community.

We haveven been able to put our finger on it, but it ISN in that kind of neighborhood.

And Youre right were a little bit less than half of what normal has been pre pandemic.

It's a significant amount of dollars that are tied up because of the cycle time increase.

Tied up because of the cycle time increase.

And we do envision that we will grow our inventory to a more normalized level, we might even go beyond that.

And STE vieyou a pretty closelywe at about 16 thousand starts this quarter, So good math.

And.

Got and then in addition to that one point eight billion, you know neighborhood kind of number, you would also mention that you could see your inventory shrink further due to slower growth, more on the on the land side and that sort of stuff. But I assume that growth comment is temporary. So I'm thinking that near term, a lot more longer term, the opportunity is probably really on the whip. So correct me if I'm wrong on that, but I wanted to ask about your standing inventory comment as well.

The point in raising the low level of inventory. So we don't we want people to understand we want everyone to understand that we're not just putting production in the ground and allowing inventory to build up.

Have a disciplined approach to sales and making sure that we're clearing inventory that's what our dynamic pricing model is all about and we're on it every day, but at the same time your point that having some standing inventory.

You said, I think John , you mentioned about 500 finished, completed. You know spec or finished specs right now.

As a benefit to customers looking for an instant move in.

The way I'd calculate that that's about two to three times where you typically have two to three times more than that you know before the pandemic hit, and all that you know on a per community basisand So I'm wondering: is this 500 like the new normal for you? Is this a new desired level for you and, if So, why is that? If what we've been hearing is true, that you're you seeing that folks are actually fairly actually preferring customers, are preferring homes that they can move into?

We will.

You haven't been able to have inventory on the ground during the pandemic time.

It is best practice to have a little bit more than we have right now and will grow to that level.

But it will be done in a very disciplined way.

Mike do you want to add to that.

So I think you really covered exactly what our operating strategy as Gordon just given your assessment of the numbers is right and the consumer desirability, especially in a changing interest rate environment.

More quickly. Just wanted to understand if there's any change in you're thinking about managing specs as they get near completion and why you might be looking to reduce that number in light of customer preferences.

A quick move in they can lock in their rate if they buy today and create that certainty for themselves. So that is definitely an advantage.

But we're very focused as Stuart highlighted using dynamic pricing to make sure. Our homes are sold in time, so as they come off our construction Assembly line, we're able to deliver them to the customer and that will fall in that range.

So to another good observation you're actuallysolute right. We basically run our inventory around about one home per community and you're right. We're a little bit less than half of what normal has been prepandemic and we do envision that we will grow our inventory to a more normalized level. We might even go beyond that and.

In a more normalized time of about one community per week.

It'll fluctuate from time to time, but that's our focus.

Only thing I'd add to that Steve as Stuart said in his comments and I had mentioned as well, we're very focused on cash generation.

<unk> cash to generate is the sale of our completed homes.

The point in raising the low level of inventory. So we don't. We want people to understand, we want everyone to understand that we're not just putting production in the ground and allowing inventory to build up. We have a disciplined approach to sales and making sure that we're clearing inventory. That's what our dynamic pricing model is all about and we're on it every day. But at the same time your point.

But to the extent that we have standing inventory, we're going to sell that home because we've got homes moving through the production cycle that are going to replace that.

Whether it's a half for one we've continued to refine our pricing strategy.

Maximize the cash and quickly sell the inventory as it progresses from stage to stage.

And then when you're done.

To add do go back to your earlier comment yes.

That having some standanding inventory is is a benefit to customers looking for an instant moveving. We will haven't beenabable to have inventory on the ground during the pandemic time. It is that practice have a little bit more than we have right now and we will grow to that level, but it will be done in a very disciplined way. johor, if you want to add to that.

Zero growth rate would be a temporary condition not a permanent one.

But there is there is an overhang or an overshadowing concept of matters, we don't want to fight the tape.

So we're not going to try to grow when the tape is telling us not to and Thats clearly the case, but as the market comes back and as I noted in my comments. The long term prospects for housing are strong and good as the market turns around we'll be very well positioned with a very strong cash position to be able to lean in to market.

I think you really covered and exactly what our operating strategy is stored and is giving our assessment of the numbers us right and up the consumer desirability, especially in a changing interest rate environment, CRE create a quick move in. They can lock in their rate that they buy today and create that certainty for themselves. That is definitely an advantage. But we RE very focused, as STE are highlighted using that name of pricing, to make sure our homes are sold in time.

Conditions, improving as that happens.

Excellent thanks, very much guys okay.

Thank you. Your next question. Thank you. Our next caller is Alan Ratner from Zelman and Associates. Please go ahead Sir.

Hey, guys. Good morning, Thanks for the time appreciate it.

So as they come off our construction assembly line we're able to deliver them to the customer and that'll fall in that range in a more normalized time of about one community per week. It'll fluctuate from time and time, but that's our focus.

I guess first.

Stuart maybe directed to view, we've talked in the past about build for rent and in that space being a potential kind of counter cyclical vehicle in the event of a slowdown in primary demand, which is clearly what we're seeing today.

And only thing I'd add to that Steve is- and Stuart said in his comments and I mentioned as well, we're very focused on cash generation.

Just curious if you could talk to your current VFR business, whether perhaps you are leaning a bit more heavily on that in the current climate and obviously with your relationship with the fund and the investors there.

The easiest cash to generate is the sale of a completed home.

But to the extent that we have standing inventory, we're going to sell that home because we've got homes moving through the production cycle that are going to replace that.

What the what the current appetite is among those investors.

Whether it's a half or 1, we continue to refine our pricing strategy and maximize.

Great.

As Rick to jump in after.

The first comment and say that.

The cash and quickly sell the inventory as it progresses from stage to stage.

That.

I do believe that single family for rent is going to continue to grow and be a meaningful part of the housing market.

And then we do to add to go back to your earlier comment. Yet. The zero growth rate would be a temporary condition not a permanent one But there's there's an overhang or an overshadowing concept and that is we don't want to fight the takepe. So we're not going to try to grow when the tape is telling us not to and that's clearly the case. But as the market comes back and as I noted in my comment a long term.

No.

I've learned over the years that <unk> has always been a part of the market more dominated by the mom and pop.

Participants now it's been professionalized and more institutional buyers are significant part of the market, but that's part of the market has pulled back as interest rates have gone up as prices have come down and it has moderated.

So.

It is still a very small part of our production and our sales program.

Overall.

And.

I have no question that as prices moderate the SSR business will push in and become more of a significant part of the recovery.

So Rick do you want to fill in some of the thoughts of numbers there, yes as Stuart as you mentioned as rates have risen.

Guys good morning. Thanks for the time. Appreciate it when.

I guess first you know steuart, maybe direct to youw, you know've we've talked in the past about build for rent and and that space being a potential kind of countercyclical vehicle and in the event of a slowdown in primary demand, which is clearly what we're seeing today. And I'm just curious if you could talk to you know your current B F? R business, whether you know perhaps you're leaning a bit more heavily on that in the current climate and obviously with your relationship with the fund and the Investors there.

Several of the SFA or players use leverage that's floating in order to underwrite to finance their deals.

Accordingly.

Some of the investment in that space has slowed down.

But rents are continuing to maintain.

And as a result.

Get the ultimately get their embedded yields that theyre looking for breath as a company we had about a thousand homes that we sold to the single family rental space in the last quarter, it's probably underestimated because there were some additional sales in our communities that other folks are investing in and renting.

What do we don't what? What the current appetite is among those investors?

Great I'm going to ask Rick to jump in after I'm going to give a first comment and say that that.

Are captured in that number.

I do believe that single family in for rent is going to continue to grow and be a meaningful part of the housing market. I've learned over the years that SFR has always been a part of the market more dominated by the mon pop participants. Now it's been professionalized and more institutional buyers are a significant part of the market.

But it was about a thousand.

Our <unk> program itself was a little bit more than 700 during the quarter.

Let me just add to that and say that.

Embedded in your question I think is the question.

What percentage of <unk> ramping up.

The port tear apart of our <unk> program.

And the fact, the reality is that our program has taken a very disciplined approach to stepping back and waiting for the market to kind of reconcile itself. So.

But that part of the market has pulled back as interest rates have gone up, as prices have come down and it has moderated. So it is still a very small part of our production and our sales program overall and I have no question that as prices moderate that sffr business will push in and become more of a significant part of the recovery.

Terry you might have thought we're probably selling less to our own program.

And more to other <unk> programs outside of Illinois.

Okay, that's really helpful and thank you for that disclosure there.

It's very helpful.

So Rick, do you want to F in some of the thoughts? The numbers there? Yes steuart, as you mentioned, as rates have risen, several of the SFR players use leverage- that's floating- in order to underwrite and finance their deals.

I guess second question just on the kind of the monthly cadence you described yes.

Given the the 4% increase in incentives slash based price reductions combined with the fact that in August we obviously saw mortgage rates pull back temporarily it's not too surprising to see that that kind of be the strong strongest month of the quarter.

Accordingly, some of the investment in that space is slow down, but rents are continuing to maintain and, as a result, they'll get- LL ultimately get- their embedded yields that they're looking for breath. As a company, we had about 1000 homes that we sold to the single family rental space in the last quarter. It's probably underestimated because there were some additional splls in our communities that other folks are investing in and renting.

Thank you mentioned that September was was kind of following a similar trajectory, which I guess I'm a little surprised that given the.

The continued increase in mortgage rates or the reemergence and mortgage rates since the end of August . So have you further increased incentives or gotten even more aggressive on price reductions to kind of combat that move we've seen in rates or are you still seeing that momentum continue in spite of higher rates.

That aren't captured in that number, but it was about 1000 and our SFR program itself was a little bit more than 700 during the quarter.

No let me clarify something.

Q3, our incentives were about four 5%.

It was probably about 3% that was based price reduction on top of the incentives with the balance being somewhat next oriented to a lower price point as we moved into.

Let me just add that and say that embedded in your question. I think is the question of what percentage and are we ramping up the ptero part of our SFR program and the fact. The reality is that our program is taken a very disciplined approach to stepping back and waiting for the market to kind of reconcile itself. So contrary to what you might have thought.

We actually have.

Fairly consistent with where we were in.

In the third quarter ended August .

From a pricing standpoint.

We're just slightly ticked up slightly slightly from an incentive standpoint, our actual net sales prices up higher than it was in August .

We're probably selling less to our own program and more to other SFR programs outside of one arm.

That might be mix.

From a cancellation rate, we're right on top of where we were for the quarter.

So we are and from a sales pace standpoint, we're very consistent with where we were in August . So we haven't seen any dramatic changes.

Okay no, that's really helpful and thank you for that, the disclosure there. So it's very helpful, I guess. Second question: you just on the kind of the monthly cadence she describedyou. I think, given the the 4% increase in incentives slash, you know, base price reductions, combined with the fact that in August we obviously saw mortgage rates pull back temporarily, it's not too surpris and see that that you know kind of be the strong, strongest month of the quarter.

What this is really demonstrating is.

Really fine tuned our sales execution strategy.

Got it that's.

That's great to hear.

We are finding the market and we are finding the market primarily with primary buyers.

I think you mentioned that September was was kind of following a similar trajectory, which I guess I'm a little surprised that, given the continued increase in mortgage rates or the remergence in mortgage rates since the the end of August . So have you know further increased incentives are gotten even more aggressive on price reductions to kind of combat that move we've seen in rates. Or are you still seeing that momentum continue in spite of the higher rates?

And as we find the market there is demand out there.

Demand needs affordability.

So.

That's basically what's happening.

To that point, if I could squeak in one more.

Sounds like many of your competitors have been a bit more reluctant to be as aggressive as you have on the pricing side. So I'm curious if you're seeing more builders of late kind of respond to enforce.

Now let me clarify something. So for Q3 our incentives were about four perpoint point a half percent.

To try to match with what you guys are doing and presumably one or two of the other larger builders are doing or is there really a clear divergence right now in terms of strategies out there some builders trying to hold onto margin as long as possible and others trying to find the market as you guys are doing.

There was probably about 3%. That was base price reduction on top of the incentive, with the balance being somewhat mix oriented to a lower price point.

Look it's a mixed bag.

As we moved into the, we actually have been fairly consistent with where we were in.

There are some builders that are.

Going along with the program that we have in place there are a lot of others.

In the third quarter and in August .

That have different strategies.

From a pricing standpoint were just slight ticked up light slightly. From an incentive standpoint, our actual net sales prices up higher than it was in August .

The smaller builders are reacting a little differently than some of the larger builders.

And.

That's just.

As to the Choppiness of the market condition.

That might be mix. From a cancellation rate, we're right on top of where we were for the quarter, So we are, and from a sales pay standpoint, we're very consistent where we were in August , So we haven't seen any dramatic changes. I think what this is' really demonstrating is we really fine-tuned our sales execution strategy.

All I can tell you is that market by market, we know exactly what the competitors are doing we see the inventory buildups, where they are happening we see the migration to sell to a price hold and wait.

And ultimately falling off the cliff the same reconciliation.

Each of these plays out in each market and it's why we emphasize our dynamic pricing model.

Each of our divisions, because thats, what keeps us tuned in to the competitive field exactly what's happening and making the judgment that are necessary I think Rick said it really well. This is an art not a science and.

That's great, de. We are finding the market, and we are finding the market primarily with primarary buyers. And as we find the market, there's demand out there, but the demand needs affordability. So that's basically what's happening.

We are we are playing.

The game in each market that exists by knowing what the competitive field.

That point sort, if I could squeak in one more. You know, it sounds like many of your competitors have been a bit more reluctant to be as aggressive as as you have on the pricing side. So I'm curious if, if you're seeing more builders of late kind of respond in force, you know, to try to match what what you guys are doing and presumably one or two of the other larger builders are doing, or is there really a clear divergence right now in terms of strategies out there, some builders trying to hold on to margin as long as possible and others.

Reacting to it.

Alright, I really appreciate the thoughts guys. Thanks a lot.

Next question. Thank you John Lovallo with UBS you May go ahead Sir.

Thank you for taking my questions guys. The first one is can you just help us on the sequential walk in gross margin from <unk> to <unk>, it's about 270 basis points at the midpoint.

Much as base price reductions how much is other incentives rising costs and how much of an offset as sort of the typical seasonal operating leverage.

We're going to take that.

Putting cost to the side I would say that.

Half of.

As it was.

We sell incentive.

40%, 30% of it was based price reductions.

The choppiness of the market condition. All I can tell you is that, market by market, we know exactly what the competitors are doing. We see the inventory buildups where they're happening. We see the migration to skeletto price hold and weight and ultimately falling off the CLI saying reconciliation.

And the balance was probably some cost and mix.

Hi, John .

I think that's right.

<unk> talked about on prior calls.

Second happened in the fourth quarter will be our peak construction costs are the highest lumber worked through that and that will start coming down at the very end of the fourth quarter and into the first quarter. So.

Each of these plays out in each market, and it's why we emphasize our dynamic pricing model to each of our divisions, because that's what keeps us tuned in to the competitive field, exactly what's happening and making the judgments that are necessary. I think Rick said it earreally well: this is an art, not a science, and we are. We are playing the game in each market that exists, by knowing what the competitive field is and reacting to it.

That makes sense, what you said, Rick and clearly the biggest driver is what we're doing to adjust to market to keep our sales pace.

Yes, let me just add to that and say that.

In addition to.

Pricing.

And.

Base price as well as incentives management, we're also managing our backlog.

Recognizing that as price adjust prices adjust we also sometimes you have to go back to our backlog, we don't want to turn yesterday sales and customers into our cancellation and so theres some administration of that as well.

I don't really appreciate the thought guys next a lot.

Next question.

Thank you, John lavea. Would you be a? You may go ahead, sir.

Great Thank you for taking my questions, guys. The first one is: can you just help us on the sequential walk and gross margin from three Q to four Q? It's about 270 basis points at the midpoint. How much is you base ICE price reductions, how much is other incentives, rising costs and how much of an offset is sort of the typical seasonal operating leverage?

So lot of moving parts in the walk from third quarter to fourth quarter margins.

It's not as linear as just what the new sales are.

Okay. That's helpful guys. Thank you and then maybe switching gears to core Tara.

Third party equity commitments for the asset management business I think were $4 billion last quarter, what has that grown to and how much third party capital has been committed to the land strategies.

Request to take that. Yes, So putting cost to decide, I would say that half of the it was.

We haven't put those numbers out so I really can't put those numbers on the table, we're bit restricted as to what we can disclose at this point and we're going to do something more comprehensive.

We sell incentive.

40 30% of it was base price reductions.

And the balance was probably some cost and X.

And putting together conference call to really let all of those pieces of numbers be known as we're getting ready to actually go public.

ay ajah.

I think that's right, as Res talked about on prior calls, that the second half in the fourth quarter will be our peak.

I'd say it again stay tuned.

Okay fair enough. Thank you.

Okay. Thank you and we'll take our last question now.

Construction cost as the highest lumber. Work through that and that LL start coming down to the very end of the fourth quarter and into the first quarter. So that makes sense. What you said Rick, and clearly the biggest driver, is what we're doing to adjust to market, to keep our sales pace.

Mike Rehaut from Jpmorgan, Sir you May go ahead.

Thanks, Thanks for squeezing me in.

I guess its good afternoon, everyone.

Just wanted to get a sense directionally.

Yes let let me just add to that and say that in addition to pricingand base pric, as well as incentives management, we're also managing our backlog, recognizing that as price adjust, prices adjust, we also sometimes have to go back to our backlog. We don't want to turn yesterday sales and customers into a cancellation.

For gross margins at least as we think past the fourth quarter and.

Obviously.

Totally appreciate youre, not giving guidance for a good reason at this point for fiscal 'twenty.

'twenty three but as we think about maybe the first quarter or two.

And you look at the.

The four 5% average incentives for the quarter and you ended August around 6%, So you're talking about another 150 bps.

And so there's some administration of that as well, and so a lot of moving parts in the walk from third quarter to fourth quarter margins. It's not as linear as just what the new sales are.

If we just kind of help things there.

And also held cost and I know, you're working hard on the cost as well, but is that a good starting point to think about the difference between.

Okay that's helpful guys, Thank you. And then maybe switching gears to quterra, third-party equity commitments of the asset management business. I think we four billion last quarter. What is that grown to and how much third-party capital has been committed to the land strategies?

First quarter 'twenty, three gross margins and what Youre doing currently that additional 150 bps.

Again holding other.

Understanding the key variables constant.

We haven't put those numbers out. So I really can't put those numbers on the table, where a bit restricted as to what we can disclose at this point and we're going to do something more comprehensive in putting together conference call to really let all of those pieces and numbers be known, as we're getting ready to actually go public. So I say it again: theyag juned.

So.

Mike I think the best way for me to answer this is to say that.

We have decidedly not given guidance for the fourth quarter because there are so many moving parts. We recognize the best we can do is give some boundaries to help the modeling.

I think that there is.

It gets even more complicated as we go out to the to the first quarter. So we're not going to Wade into those waters simply because theres a lot moving around.

Get paared, Thank you. Okay, Thank you, and we'll take our last question now.

Thank you Mike, very hard from G P margan thir, you maybe go ahead, thanks. Thanks for squeezing in good, I guess it's good afternoon now. Everyone just wanted to get a sense directionally for gross margins at least as we think past the fourth quarter, and you know obviously I.

As we said yesterday and listened to chair Powell.

Lay out kind of his thinking for the way forward.

Just helps us recognize that.

That we're living in a dynamic environment, that's going to change a lot of things.

By month quarter by quarter.

And we're focused on week by week, our management team gets together every other day to to coordinate to find alignment and to look at the patterns that are revealing themselves real time in the marketplace and each market is different so.

Totally appreciate not giving guidance for a good reason at this point for fiscal 23 But as we think about maybe the first quarter to- and you look at the four point a 5% average incentive for the quarter and you ended August around 6%. Search I about another 150 bits.

I guess, that's a big and long winded excuse.

To theif. We just kind of held things thereand also held cost- and I know you're working hard on the costs as well. But is that a good starting point to think about the difference betweenthe first quarter- 23 gross margins- and what you're doing currently, that additional 150 dips again holding other?

But we're not really going to weigh in on our first quarter numbers right now.

Okay.

Appreciate that.

I guess.

Similarly at the risk of <unk>.

Asking another question that might be hard to answer but.

Directionally, how should we think about community count in 2003, obviously this year you are looking to end with some sequential growth.

Understand we key variables constant. So Mike, I think the best way for me to answer this is to say that we have decidedly not given guidance for the fourth quarter because there are so many moving parts we recognize the best we can do is give some boundaries to help the modeling. I think that there it gets even more complicated as we go out to the first quarter.

<unk> to <unk>.

Given the moderation in sales pace.

Obviously.

Delays in such can impact the rate of openings, but is growth.

We should think about next year and if so.

Any sense of degree of magnitude.

Great question, we've given that a considerable amount of thought I'm going to turn to Rick and the second on this because it's his favorite topic.

So we're not going to wait into those waters simply because there's a lot moving around. As we sat yesterday and listen to chairpowell lay out kind of his thinking for the way forward, it just helps us recognize that that we're living in a dynamic environment that's going to change a lot of things month by month, quarter by quarter, and we're focused on week by week.

But.

But we are thinking about community count growth into next year can't prove it right now, but we think that theres going to be some comparable reconciliation and land pricing.

Which will enable us to find opportunities that are right sized for current market conditions.

But we're going to have to wait and see on that Rick could you answer that.

So our community count is so tricky because it has.

Our management team gets together every other day to coordinate, to find alignment and to look at the patterns that are revealing themselves real-time in the marketplace, and each market is different.

<unk> impacted by your sales pace in your existing communities development.

Timing.

Whether it's internal development or third party developers in house, whether they get the community is done at the appropriate time.

So I guess that's a big and longan-renindeed excuse, but we're not really going to weigh in on our first quarter numbers right now.

Sitting here today.

We believe our community count will increase in 2023.

Probably a single digit low single digit increase.

Okay appreciate that I guess you know similarly at the risk of asking another question that might be hard to answer but you.

And that could be skewed by what happens in the land market.

As other builders may walk away from deals that have finished homesites that.

Directionally how should we think about community count in 23 you know obviously this year. You're looking to end with some sequential growth three Q to four Q given the moderation and sales pace you know obviously delays in. Such can impact the rate of openings but.

Look good for us from an underwriting standpoint, because of our low cost structure.

We may find some opportunities.

To add to community count.

But as Stuart said, it's tough it's a tough read right now, but it looks slightly up.

Great. Thanks, so much thank you Mike Alright.

We'll wrap it up there one thank everyone for joining us these are tricky times, but.

Is growth, how we should think about next year and, if So, any sense of degree of magnitude?

This is a seasoned management team thats been there been here before.

We have a game plan strategy.

Great question. We've given that a considerable amount of thought. I'm going to turn Rick in a second on this because it's his favorite topic, but but we are thinking about community count growth into next year. can't prove it right now, but we think that there's going to be some comparable reconciliation and land pricing which will enable us to find opportunities that are right size for current market conditions.

You can expect that we're going to be adhering to that strategy.

Certainty and look forward to reporting back as we get to the end of the fourth quarter. Thank you everyone.

Thank you. This concludes today's conference call you May go ahead and disconnect at this time.

But we're going to have to wait and see on that Rick could you addwer that allult community count is so tricky because it has.

It's impacted by your sales pace and your existing communities development timing, whether it's internal development or third-party developers, and whether they get their communities done at the appropriate time.

Sitting here today. We believe our community count will increase in 2020. -three and.

Probably a single digit low, single digit increase and that could be skewed by what happens in the landmarket because, as other builders may walk away from deals that have finished on sites that look good for us from an underwriting standpoint because of our low cost structure, we may find some opportunities to they add to community. But, as Stuart said's, it's tough. It's a tough read right now, but it looks.

reping back as we get to the end in the fourth quarter. Thank you everyone.

And thank you. This concludes today's conference call. You may go ahead and disconnect at this time.